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Research reveals overlooked factor driving China’s real estate crisis

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Research reveals overlooked factor driving China's real estate crisis
Residential buildings developed by Evergrande in Yuanyang County, Henan. Credit: Windmemories – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=101099032

The default of Evergrande, one of China’s largest developers, set off a chain of defaults among developers, triggering the ongoing property market crisis in China.

While analysts frequently attribute the crisis to China’s tax system, land finance, state intervention, and various other factors, recent University of Michigan research has revealed an often overlooked aspect–the concentrated nature of the real estate industry.

The research, led by Lan Deng, professor of urban and , examined China’s real estate industry from the early 2000s to 2018. It found that the industry became increasingly concentrated, with large firms accounting for a growing share of the country’s production, which played a significant role in the market’s downturn.

For instance, the top five real estate developers in China accounted for 30% of the country’s total housing production in 2018, compared to a share of 13% in the U.S. Housing production in the U.S. was only about a quarter of what China has produced in the last decade.

The China Real Estate Top 10 Research Group further highlights this concentration–among 10,000 registered real estate development firms in the country, the market share of the top 100 firms, as measured by sales revenue, increased from 28% in 2012 to 58% in 2018.

The repercussions of such conglomerates failing are wide-ranging, as demonstrated by Evergrande and Country Garden, the top two property developers in China. Evergrande, once boasting an annual construction of 72 million square meters, filed for bankruptcy protection in August 2023.

Country Garden, whose annual housing production was about twice the size of Evergrande before the pandemic, defaulted in October 2023 and faced a liquidation petition from its creditor the following year, according to the latest news reports. The collapse of these industry leaders has placed a drag on the entire Chinese property market.

The concentration of the real estate sector in China was mostly due to the advantages large developers enjoy, according to the study. Large developers often had access to low-cost capital. In China, all major banks are state-owned and banks’ ability to lend is thus heavily regulated by the state.

Concerned about the country’s economic overdependence on the real estate industry, the state-mandated only developers assessed as low risk could obtain bank loans–these were typically large developers with direct or indirect ties to the state.

Another factor that contributed to the concentration was China’s presale model in the property market. Under the presale model, buyers’ down payment, as well as their mortgage loans, are transferred to developers during the development process, which are then used as development capital. Because of the risks associated with presales, homebuyers in China would prefer purchasing housing from with established records.

China’s open land market system also favored large developers. In China, land is owned by the state and is sold to the highest bidder via an auction process. As a result, only developers with sufficient financial resources can win the bid–usually, they are large developers. Since 2006, the Chinese central government has imposed a land quota system that limits the amount of land can supply for urban development.

As a result, from 2004 to 2018, the annual increase in land cost averaged about 17%, while the average annual increase in housing price was about 9%. That land cost has risen at a much faster pace than housing prices indicates a declining profit margin for real estate development over time, making it difficult for small developers.

“The concentration of the real estate industry not only exacerbates challenges for the but also brings negative impacts to local economies,” Deng said.

The real estate sector contributed around 20% of China’s GDP. Large developers often expanded nationally, looking for new development opportunities outside their home cities, especially in regions with lower land costs, leading to housing oversupply in those places.

For instance, China’s top 30 real estate development firms were building across an average of 80 cities in 2017, compared to an average of only five cities in 2003. Evergrande has grown from building in 25 cities in 2009 to building in 228 cities in 2018.

As firms expanded across cities, real estate development was less of a local business, as profits earned through local residents’ home purchases were often sent back to those firms’ headquarters, which are usually located in more prosperous regions, contributing to the rising regional disparities, the study found.

Furthermore, when local markets turn in a negative direction, those large national firms could quickly withdraw their investment from less-developed places, as seen during the COVID-19 pandemic. This exposes local economies, often reliant on real estate as a growth engine, to dire consequences with little development activity, according to the study.

The study is published in the journal Housing Studies.

More information:
Lan Deng et al, Housing production and the structural transformation of China’s real estate development industry, Housing Studies (2024). DOI: 10.1080/02673037.2024.2334797

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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